1. ORDER 1' This order shall dispose of the proceedings illitiaed Through Show Cause Notice 'bearing No fV1SW+SMDISE.+1 (5)2006 dated May 22. 2008 ("the SCW) issued to Crescerr S::-..Ndard Brokerage and Investment Services Limited (the "Respondent') member of the Lahore Sock Exchari.;e (Guarantee) Limited ("LSE") by the Securities and Exchange Commission of Pakistan 1:'the Commission I tinder Rule 8 of the Brokers and Agents Regisiration Rules, 24101 ("the Brokers Rules'( vro:ation of RtIle 12' of the Brokers Rules aiA clause AS of the Code of Conduct airMakned in the Thrifd Schedule thq-2. Brokers Rules.
2. The brief facts. Of the case are mat the Respondent member of LSE and is registered with the Commission under the Brokers Rules. An enquiry was initiated by the Commisson in exercise of its powers under Section 21 of the Securities and Exchange Ordinance. 19E9 cthe Ordinance") ono Anium Asim Shahid Rahman Chartered. Accountants ('the Enquiry Officer') was appointed as the Enquiry Officer tinder the above menlioned Section for the following; to enquire into the dealings. Business or any Transaction by the braer during the per oc from April 01 200610 June 15. 2006 {-the Review Period") to identify any and all the. Acts or omissions constituting the violation of the Ordinarce and the Rules made thereunder to identify viotations of any other applicablelaws. Including but not limited to the Brokers. Rules, Regulations for Short Selling under Ready Market. 2002. (Short Selling Regulations'). General Rules and Regulations oi LSE.
2. Securities and Exchange Rules the 1971 Rules-, art: directives issued by the Commission from time 10 time.
3. 3 The findings of the Enquiry Officer revealed several instances of potential non compliances with applicaoio laws and regulations A copy of the Enquiry Officer's report was sent to the Respondent on April 24 2008 which required the Respondent to provide explanations on the observahorts of the Enquiry Officer together with supporting documents 4 After perusal of the Respondents replies to the above mentioned letter, which did not explain the position in respect of some instances, the SCN was issued to the Respondent under Rules:8 of the Brokers Rules staling that tt,e Respondent has unpile facie contravened Rule 12 of the Brokers Rules read with Clause A5 of the Code of Conduct contained in the Third Schedule to the Brokers Rules which are reproduced as under: Rule 12- A broker holding a certificate of registration under these rules shal! Abide by the Code of conduct specified in the Third Schedule' Clause AS of the Code of Conduct- A broker shall abide by all the provisions of the Securities and Exchange Commission of Pakistan Act, 1997 (the Act') and the rules_ regulations issued by the Commission and the stock exchange from time to time as may be applicable to him"
5. On May 22. 2008. The Respondent was called upon to show cause in writing within seven days and appear before the undersigned on June 03 2008 for a hearing to be attended either in person andtor through an authorized representative, 6 The hearing was attended by Mr Tang Ateem, Chief Executive Officer of the Respondent who argued the case. The Respondent during the nearing requested that its earlier reply lathe enquiry report dated April 30 2008 may be treated as reply to the SCN.
4. 7 A summary of contentions and objections that were lased by the Respondent in ItS written submissions and :during the hearing and findings and concluSion of the Commission on the same is as follows 8. Blank Sates 1, Issue No.1") 81 in terms of Regulation 4 of the Short Selling Regulattohs, Blank Saxes are not permissible and in terms of Regulation 5 of the Short Selling Regulations, it is provided that.
5. 'No Member shall make a Short Sale.Untess, Prior contractual borrowing arrangement has been made The sale is made at an uptick, and G. The trade is identified as a Short Sale at the time of placement of order' 8.2 The findings of the Enquiry Officer revealed 299 instances of Blank Sales during the Review Period 8.3 The Respondent made the following submissions on the issue' The RespOndertl, during the bearing admitted thal its clients had 43rigaged in Nank Selling its clients did not have any pre-existing interest against the sales mentioned in the Armomire - A ("the Annexure") of the SCN The Respondent further stated that its system was not capable of deleong shori selling and it 1005 in pradice of checian9 dierUS' nsitions aly at the end of the gay Tr,erefore.
6. The system failed 10 detect the c.Lients whe. Engaged in first selling and tatef on squaring their positions on the same day.
7. 8 4 I have considered the contentions of the Respondent and ht is clear that 299 Blank Sales have been made in violatzn pf Regulation 4 of the Short Selling Regulations. In terms of RUlo 8 al The Brokers Rules. Suti y ule. (ii) where the Commission Is of the opinion that a broker has inter alia lo comply with any requirements of the Act crr the OrdinanCe or of any rules or directions made or given thereunder in terms of sub rule (iii) has contravened Ihe rules and regulations of !He stock exchange 8fid ift terms of sub rule (iv) has failed lo any requwernent of the Code of Conduct laid down in the Saleaule the Commission may in the publc interest: take action under Rule 8(a) or (b) of the Brokers Rides.
8. 8.5 to lign; of the above facts that the Respondent by making Blank Sales has violated the sriot Selling Regutalions thereby attfactmg sub rule OH) of the Rule .8 of the Brokers Rums and has also failed to comply 41-5 Clause A5 of the Code of Conduct contained in the Third Schedule 10 the Brokers Rules, thereby attraCthig sub riAa {iv} 01 Me Rule 8 of the Brokers Rules. Accordingly. a penaity of Rs 75,co (Rupees Seventy Five Thousand only) is hereby imposed on the Responder.' under Rule 8 (0) of the Bfokers 9 Account Opening Forrns (Issue No. 2') 9 1 In terms of Commission's Difective No. SMDISE2(89) mu dated July 23, 200.3 whtch Teq I ms the members-brokers to main1ain Account Opening Forin(s) ("the AOF(s)r) in conformily with the Standardized Account Opening Fcrrn (--the SAOF") prescribed by the Commission and subsequent changes made 10 the SAUF vide Setters No SIM...SE:2(89) 2003: dated November 19: 2003 and January 20, 2004 SubseTilently this CALIF was also made part of LSE General Rules and Regulations as Chapter VIll. The sald diredkies of the Commission require that List of Trangadon fee; commission to be cnarged by the broker and other CDC charges to be levied should be enclosed %Pith the AQFs.
9. Attested copies of .Cfients' CNies should be aitacried with AOF(E).
10. Nathe$ of Nornifiee should be mentioned an ApF(s) All fields of AOF;s1 should be properly filled in and non apolicable fields should be marked as 'NIA' All A0Fs should be available in record of frie broker.
11. 6 A0Fs should be signed by the witnesses'.
12. 9.2 The findings of the Enquiry Officer revealed that.
13. Lists of transaction fee_ commission to be charged by the broker and other CDC charges to be levied were not enclOsed with the Attested copies of clients' CN ICS were not attached with AOFI:s. Names of Nominees were not mentioned on AOF(s).
14. Non applicable fields in the AOFs were not marked as 'NIA-.
15. AOFs were nol Signed by lhe witnesses AOFs of 12 Clients were not available In record of the broker 9.3 The Respondent made the following submission on these issues 'y'Viih regard to a bovementioned deficiencies the Respondent asserted that same were result of human errors in some of the AOFs.
16. With regard to the missing AOFs the Respondent acknowledged that currently the same were not available on record. Moreover the Respondent stated that all the AOFs were available when the brokerage house was operatfianal in 2006. However, some of the record had gone missing during shifting of the office.
17. 9.4 I have considered Ihe contentions of the Respondent and me issues raised therein and the same are addressed by me below: I have considered the contentions of the Respondent and it Is clear to me that the Respondent has failed to maintain AOFs accordance with the Commission's directives and LSE General Runes arid Regulations The Respondent should ensure that all its record is maintaineo properly and. Safely. It may be noted that AOF is the basic agreement between clients and the broker anc in case of any dispute all matters are resolved as per the clauses of AOFs 9.5 Taking into account the low number of missing ACrs and deficiencies- in some of the AOFs , I am Inclined, on this occasion, to lake a lenient view in the matter and will not lake any punitive. Action under the Rule 8 of Brokers Rules. As such I believe a 'caution" in this instance to the Respondent would suffice and 1 would further direct the Respondent to ensure that full compliance is made of all the laws regulations .And directives of the Commission in future for avoiding any punitive action under the law 10 Order Register ("Issue No. 3") 1'3 ' ~ terms of Rule 4(1) of the 1971 Rules it is provided that "All orders to buy or sell securities which a member may receive shall be entered in the chronological order, in a register to be maintained by him in a form which shOws the name and address of lhe person who placed the order, the name and. Number of the securities to be bought or sold. The nature of transaction and Me {imitation, if any as to the price Of the securities or the period for which the order Isto be valid.." 10.2 The findings of the Enquiry Officer revealed that the register as mentioned above was not maintained by the Respondent during the Review Penal.
18. 1C.3 The Respondent made the following submission on the aforementioned issue: The Respondent during the course of hearing acknowledged that the Order Register as mentioned above was not maintained. However, the Respondent stated that telephonic recording of all calls ,ere kept by the brokerage house to fulfill this requirement however, same is not available in record now.
19. 10 L I have considered the contentions of the Respondent and it Is clear that Order Register as required under the Rule 40) of the 1971 Rules was not being maintained by the Respondent, Further the Respondent asserbor. That recording of all telephone calls was kept by the house can not be accepted in absence of any proof a' same 10.5 Considering the above mentioned fact I am inclined, on this oct-6.Sion. To take a lenient view in the inattei and will. Not take any punitive action under Rule 8 of the Brokers. Rules As such, 1 believe that a caution in this instance to the Respondent would suffice and I would further direct the Respondent to ensure that full compliance is made of all the laws, regulations and directives of the Commission in future for avoiding any punitive action under the law.
20. 11 Separate Bank Account for Clients Funds ("Issue No 4")
21. 1 1 In re.-cris at Commission's directive Na. SME,'ISE 2(20;;2002 dated March 4, 2005 which states "The exchanges are to ensure that brokers follov,, the practice of segregating clients assets from the broker's assets in order to ensure that clients' assets are not misused.
22. For this purpose brokers should have one separate bank account which includes al. The cash deposits of their clients along-with reconistreakdown of client positions " 11 2 The findings of the Enquiry Officer revealed that the Respondent was not maintaining a separate bark account for clients' funds 11 3 The Respondent made the foltowing submission on the aforementioned issue' The Respondent during the hearing asserted that a separate bank account was being maintained for the clients' funds and for the house expenses a separate bank account was being maintained However, during the month of June 2006, as the brokerage house was being closed, utility bills related transactions were routed through the bank account which was being ['unstained for clients funds.
23. 1T 4 Considering the above facts and the contentions of the Respondent, it is evident that Respondent has failed no comply with Commission's directive The Respondent should not route any transaction of the brokerage house through the bank account maintained for clients' funds.
24. 115 Ill this issue I am inclined to take a lenient view and will not take any punitive action under Rule 8 of the Brokers Rules I believe that a caution in this :nstance to the Respondent would suffice and I would further direct the Respondent to ensure that full compliance is made of ail the laws regulations and directives of the .Commission in future for avonirng any punitive action under the law.
25. 72 Trade confirmations ("Issue No. 5")
26. 12 1 AND WHEREAS. Rile 44) of the 1971 Rules states that.
27. 'A member executing an order of a customer shall, within twenty four hours of the execution or the order, transmit to the Customer a confirmation which shall include the following information namety - I date on which the.Orcer is executect ii name and number of the securities, iiF nature of transaction (soot, ready or forward and also whether bought or sold'i.
28. Price; v. Commission, if the member is acting as a broker: vi whether the over is executed for the members own accoum or from the market 12,2 AND WHEREA$, the findings of the Enquiry Officer revealed. That copies of confirmations as mentioned above were not kept in record.
29. 12.3 The Respondent made the following submission on the aforementioned issue The Respondent asserted that it did send all the trade confirmations to the clients within 2 hours of the trade and as a proof of same copies of courier service slips were provided to the Enquiry officer. However, the Respondent adenitied that duplicate copies of trade confirmations were not kept in record but the same were being maintained In soft copy form 12.4 I have considered the Respondent's assertions and of the view that the receipts of the. Couner maintained by the Respondent merely demonstrate the fact that some information was disseminated to the clients and did not provide information .About the contents of the information disseminated. Hence the spirit of the above mentioned Rule was not being followed.
30. 12.5 In light of the above it is established that the Respondent has violated the requirements of Rule 8 (1) (g) of the 1971 RiAes. Thereby attracting sub rule (ii) of the Rule 8 of the Brokers rules and has also failed ro comply with Clause A5 of the Code of Conduct contained in 1he Third Schedule to the BroRers Rules, thereby at1rading sub rule (iv) of the Rule 8 of the Brokers Rule Accordingly, a pectay cd Rs.1.000 (Rupees One Thousand or4) is hereby imposed on the Responden1 under Rule 8 (b) of 11-ie Brokers Rules.
13. As Malec] above, the Respondent is penal;zed as follovis: As regards issue No and 5, as stated above. a penalty of Rs. 76.000/- Rupees Seventy &r4 Thousand only) is imposed No punitive action iS taken in retatioo to s su No 2, 3 31 d .1 end a gimp1a maul will 8uffic:e.
31. 13.1 The matter is disposed of in the above mariner and the Respondent Is directed to deposil the fine with the Commission not later than fifteen (15) days ftom1he receipt of this Order